As The ECB's Balance Sheet Hits A New Record High, Fair EURUSD Value Is 900 Pips Lower

Hours ago, in addition to making Cypriot sovereign bonds no longer eligible as collateral at the ECB, the European Central Bank also announced something that received less attention, namely that its balance sheet rose by €31 billion in the past week (due to an increase in the MRO) to a new all time record high of €3.058 trillion. In other words, even as the Fed's balance sheet continues to be flat, or is even modestly declining, the ECB continues to pick up the monetary slack with all new fiat ending up to benefit the US capital markets.

Now as frequent readers know, this latest shift in the relative size of the two critical CB balance sheets also means something else: that the fair value of the EURUSD implied purely on balance sheet correlation, a relationship that historically worked perfectly, yet in recent months has broken down due to the market's conviction that more QE is coming any minute now, is now just above 1.16, or just shy of 900 pips lower from here.

In other words, if the Fed is content with doing nothing else, and forces the ECB to do all the unsterilized intervention going forward, the EURUSD has no choice but to go much lower. On the other hand, the fact that it still refuses to do so, is confirmation that the market expects much more from the Fed - roughly $400 billion based on the above correlation. So much so, that as observed a few weeks ago, the second the news breaks of more LSAP, the EURUSD is likely to soar by at least 400 pips, and that ignore the near record amount of shorts still embedded in the EURUSD position.

"The game's up. There's no transactions, M&A isn't happening, this is what deleveraging looks like. It's a decade of austerity and that makes people feel more unlucky," he said.

"Investment banks are going to struggle. There's not going to be mass lending going on. The leverage game is over and people can't accept it. Volumes are declining en masse and their headcounts are too high."

Made the mistake of going to my Scotiabank Branch to order some Maples (ScotiaMccota is Canada’s largest Bank dealer) and it was quite the sight to see.

First off they had no idea how to process it because THEY NEVER DO IT!

Me “I would like to buy some Gold Maples”

Teller 1“Sure, HOW MUCH GOLD WOULD YOU LIKE?!?” she seriously yelled it out.

Then the whole crew gathers around to see how to do the transaction.

Teller 2“Sarah, HOW DO WE BUY GOLD?!?!” again, clueless #2 yells it out

Then the manager finally came to help out and said this was only the second timeshe has had to purchase for a customer.Then she asks me “so, is gold at a good price?” I said “yes, its always a good price, just buy it.”

I was a little on edge with how freely they were yelling out what I was buying.Never again, I will buy on line from now on.

With the marginal utility of debt now well below zero, they are fully aware there is no such thing as productive lending at these rates when they're already too exposed to both all of their own bad loans, as well as those of their counter-parties.

In other words, they cannot afford to take the risk as they to retain all of the unencumbered reserves they can keep a hold on. Even if your loan was zero risk, they still can't afford to decrease the size of their buffer.

Banks get margin calls too. Which makes me wonder, who got stuck holding the Cypriot paper when the music stopped just now?

Unless your business has at least $500 million of sales and very profitable (and really doesn't need the money), it is just a circle jerk exercise. The banks are tripping over each other to throw money at their favorite leveraged deals taking some equity risk at L+250. But the poor small business owner that needs a couple hundred thousand can go pound sand even if they have collateral and be willing to pay higher rates. Do you think this has anything to do with this non-recovery recovery?

They think volumes are declining because of deleveraging? This is bullshit. The defaults are taking place on the taxpayer's books aka the agencies. Volumes are down because there is no capitalism anymore and everyone knows it. You reap what you sow aholz.

I kno right?... Sometimes I wonder how many TBTF executives, knowing what they know, basically are 'squatters' on high leveraged property or real estate... I guess it's fucking what I would do if I happened to not have a conscience and instead be a useless sociopath...

All work an no play makes Jack a dull boyAll work an no play makes Jack adult boyAll work an no p lay makes Jack a dull boyAll work a no play makes Jack a dull boyAll work an no play make Jack a dull boyAll work an no play makes Jack dull boyAll work an no play makes Jack a dull bo

Sorry, I knew that. It is, in effect, a peg though since there's not to many reasons why the franc would decrease in value compared to the euro.

The dollar, as I recall, became the world's reserve currency along with the pound I think (and gold) in the 1920s due to there not being enough gold and America and the Empire being the last CBs left with any reserves. A central bank could use dollar reserves to back its currency and to settle accounts just like it could use gold. This came about, I think, without the concurrence of the Americans.

Tyler; thanks. Wish I could learn more, faster, on what you post. Would it be possible for you to insert some "clear text" for a small investor to understand the take away action items on your observations? I'm guessing such an item here would be foreign exchange bet (EUR/USD exchange going down)???

He's saying that from what he can tell it (EURUSD) could go either up (with big Fed QE) or down (if no Fed action). To repeat: it could either go up or down. So there you go.

I learned the hard way to either not trade at all, or to hedge my trades, in case things go a different way than I thought, which happens all the time.

Also, the "actionables" one could take away from Tyler's often incredibly insightful posts sometimes bear fruit (for which i'm grateful), and sometimes they don't. Usually it's the important timing issue: insight is right, but timing is wrong, so trade loses. The market is WAY more irrational than i ever expected. And also, remember you're betting in a "house" and the house has rigged the game...

To: BlandJoe24 Thanks Joe. So: Still wanting (hypothetically) to make a bet I need to insert some politics. Please bear with me.

The FED/ECB chart show a RHS gap which, by implication, will presumably close in the future by either: (1) EUR/USD decreasing OR (2) FED/ECB increasing (or maybe a little of both). If a binary choice is required, which is the most likely?

I would argue that the most likely shift (political reason) is EUR/USD decreasing. Reason: End game objective on both sides of the pond has to be maximizing political stability, which is heavily dependent on low unemployment. The European countries seem to either have way high unemployment (Southern) or little inclination to subsidize (Northern) their poorer neighbors. And it's not in the interest of the CBs to let their loans go up in smoke. So help keep the peace by: increasing European labor's share of global consumption by reducing the value of the EURO, i.e., EUR/USD decreases; at the same time keep nominal European wages flat.

's being reported that the figure for the bail-out of Cyprus is estimated in the 10 bn. Euro range. Let's put that in perspective, shall we?

According to the CIA factbook, the estimated population of Cyprus is 1,138,071, so that works out to roughly 8786.79 Euro per person. Alternatively, 10 bn Euro is well over half of the estimated GDP, which is reportedly 17.3 billion Euro.

-or-

The land area of Cyprus is estimated, again by the CIA factbook, to be 9,241 sq km, or about 3568 sq miles. There are around 27,878,400 square feet per mile. Dividing this into 10,000,000,000, we get a figure of 358.70 Euro per square foot, to cover every square foot of territory of the Republic of Cyprus.

If you were to print that in U.S. Dollars at the current rate, and spread it evenly, this bail-out would cover every square foot of the land area of Cyprus with about $447 each.

Now why on earth would the Fed do any more QE knowing alot more harm can be done by doing so. The US dollar's reserve currency status is already at risk. The US AAA credit by other ratings agencies would also come under further downside risk. Bernanke is not exactly brilliant but he he is not a complete moron either. I think if the imbalance is in the market expecting more QE the market has it wrong especially at these market levels. The FOMC could not have been more clear at their last meeting.

Tyler, with respect, you should think about this too, as history is a great teacher. This is a war without guns but can give the same consequence on world population, notonly for Greek, Italian and Spanish people. USA and Great Britain should know it

Most people on this site do not want bad things to happen to anyone. We are just of the opinion that the damage has already been done and that the current efforts, if you can call them that, by central banks are just making the situation worse. In other words New Orleans is flooded, get the water out and get on with the clean up. Maybe we should start calling Bernanke "Brownie" because he's "doing a heck of a job".

While I understand and respect where you're coming from, I for one would like to see the system changed, violently if necessary, and those who blindly perpetuate it for their own greed, enjoyment and whatnot trialled, convicted, all assets and possessions reclaimed and imprisoned. Starting with, lets say, Corzine will be just fine. If bad things should happen to him while resisting arrest, I can live with that.

Nothing matter out of Europe for the next 3 days. Wall street is paid a fee of 1% to 3% of assets under management. they have 3 days to maximize their take home pay for the end of Q2. It is very expensive to have a Hamptons home so the market ramp up will be in full swing by tomorrow if it has not started already.

Unfortionately its the goldbugs on sites like this that are keeping QE hope alive. Even after Ben refuses to print they run on here and eiather insist its only a matter of time or EVEN worse try and sucker in more retail investors by claiming gold will go up whether you have inflation or deflation.

WAKE UP. The markets and our Central Bankers are not totally brain dead. They are aware of the risks of printing and thus will only do it when the economy is in bad enough shape that excess capacity will hide the printing from CPI. QE isnt coming until August or a 20%+ drop in equities.

Had you listened to me before you could have sold your gold and bought it back $300-$400 cheaper. But go ahead and ignore me, junk me and go back to muttering about bankstrrs and the illuminati. By the end of July gold will be at least $100 cheaper then it is today, and the wose the debt defaults and deflation get the lower it will go.

The thing that convinces me Im right is that all you gold bugs will come on here and call me names, junk me and make up phoney arguements for why I cant be right. But none of you will admit that in the case of deflation the PM trade is broken.

When you stop even listening to the otherside of a trade you are dead. At least I admit that if the central banks cntrl P my SPX shorts are screwed.

I thought at least some of the ECB bond purchases were sterilized by short term loans it gets from the MFIs (Monetary and Financial institutions). If so, then just looking at the size of the ECB balance sheet would be misleading since the bond asset would be offset by the loan liability, and total money supply would not increase.

Here in ay diddly di Ireland, we are all moving our Euros to the UK and Switzerland. You'd have to be nuts not to. Too risky to keep Euros so move em and see how things pan out over the next few months. Who wants to wake up one morning and find capital controls and Euros that have been turned into Leprechaun money?

"ECB continues to pick up the monetary slack with all new fiat ending up to benefit the US capital markets." so, like, there's no way the fed reserve takes action that would stop that which benefits the US capital markets. right? it would be stupid. so i hope ben sits tight. patience ben. patience. you know the math. fire off a round now and its way too early. wait. wait, ben. wait.